02.10.2012 – Regulators about audit of the Fed

On October, 1, 2012 Fed Chairman B. Bernanke made comments about the Federal Reserve and monetary policy. In particular he focused on the question of the Federal Reserve audit, stating that in the 1970s the Congress deliberately excluded Fed's monetary policy from the scope of the audit. According to Bernanke, it was done in order to keep the Fed free from political pressures.

It is surprising indeed that such an important area of Fed activity as monetary policy is not subject to audit in the US. Earlier, speaking on the "limited audit" of the Fed, we wrote: “The regulator turns out to be so closed that it makes it impossible to assess its actions in all necessary detail. In this regard, it is not clear at all how in principle such advanced economic system, which declares itself open and transparent and which requires openness from others, remains so non-transparent in its key operational spheres”*.

And why in principle an ordinary inspection, which is carried out in relation to other government and commercial institutions and is considered to be a normal practice, in the case of the Federal Reserve is perceived as an instrument of political pressure?

The Fed audit legislation is now reviewed. Federal Reserve Audit Bill (H.R. 459) has passed the House and has been received in the Senate at present.

25.09.2012 – Refinancing rate is higher than inflation in Russia. In other countries the approaches are less tight.

14.09.2012 Bank of Russia raised the refinancing rate that now equals 8.25%. Such rate plays to a large extent ‘nominal/formal’ role in Russian economy. Nonetheless it sets the general ‘background’ for the cost of financial resources and gives signals to the market about the position of regulators about the economy (in this case perhaps about inflation). Approaches to setting up the refinancing rate in Russia are more conservative in general than in many developed economies, where its level is considerably lower than inflation, which makes resources more accessible and cheaper for economic players.

Sources: Bank of England, ECB, Fed, CBR

17.09.2012 – The new anti-crisis Fed measures. Long money growth.

A meeting of the Federal Open Market Committee (FOMC) was held in September, 12-13th, where new measures to help the economy were announced. Among others, there was made a decision to continue with the Operation Twist program. According to this program Fed buys long-term treasury securities and sells short-term ones. As a result the volume of the long securities is planned to increase by 85 bln. USD each month till the end of the year. Even prior to this decision, the portfolio of long securities with Fed was very large.

The increase of the long component in the US monetary base structure

Source: Fed

It is expected that the following measure will fill the economy with the long money even more (since when buying long-term securities, Fed, in fact, is exercising a creation of money with long duration).

As a result, interest rates are expected to fall in the long-market segment. This must ease mortgage development in particular.*

* Mimeo

The bulk of the long money is formed in the first place by the monetary authorities (Central Bank  Ministry of Finance) almost in all developed economies. Due to their multiplication the segment of the long resources increases even more (particularly due to resources that are formed within insurance, pension and other specialized funds).

12.09.2012 — About the large amounts of derivative contracts of the US banks

Assets and derivatives of the top 6 US banks* (trillion, USD)

* 2007 – JP Morgan Chase Bank NA, Citibank National ASSN, Bank of America NA, HSBC Bank USA National ASSN, Wachovia Bank National ASSN, Bank of New York (account for 49% of assets of the US banking system)

According to the data, published some time ago, derivatives volume of the top US banks remains extremely high. In comparison to the pre-crisis peak their volume increased more than 1.5 times. And although we hear that this results from ‘the asset repackaging’, ‘crisis-minimization schemes’ etc., we should note that we’ve heard such arguments before crisis as well. And during the crisis the derivatives exacerbated its development. So, surprises may still be expected.

November 11, 2011

On November 10, 2011, the WTO working group approved Russia’s accession to the WTO. According to mass media, Russia will become a member of the organization on its own terms: support for agriculture will remain almost unreduced, domestic gas prices will be subject to regulation, foreign banks will still have no permission to open branches in Russia.

It has been clear for many years that if Russia sticks to a consistent and persistent approach, it would be admitted to the WTO on its terms. In 2005 we wrote:

“Bearing in mind the volume of Russia’s natural resources and the fact that this volume exceeds the volume of resources that all member countries of WTO have in total, it is obvious that Russia will be accepted to the organization. The WTO member states are unable to ignore the enormous potential and vast opportunities the organization members will get as a result of full integration and openness of the Russian economy. Ultimately, the WTO is interested in Russia more than Russia is interested in the WTO, although it is, naturally, a reciprocal process which is beneficial to both sides if correctly organized and balanced.

What we see at the current stage of negotiations is a normal political and economic pressure, which is inherent to all international negotiations and is exerted to all countries with the aim to get the most from them, warning that otherwise the accession may not happen.

If the western countries feel that their position may urge Russia to revise its approaches and the accession to the WTO may be hampered all their demand will be lifted at once.

If Russia will defend the positions which are extremely important for its development (fuel prices, agriculture, finance etc.), there is a high probability that at the final such demands of western countries will be revoked in order to facilitate the accession of Russia to the WTO.”

October 28, 2011

On October 27, EU leaders adopted a program of financial system stabilization: European Financial Stability Facility will be extended, half of debt of Greece will be written off and it will receive another tranche of loan, the role of the IMF will be enhanced, capital adequacy ratio for banks will be increased. This news encouraged stock markets. Leading indexes grew by 2-6%.

This was quite expected. Particularly it was expected that in current situation political mechanisms, that are able to smoothen the problems, will be enacted. (Especially taking into account the vast number of participants of the process and different interests which hamper ‘market approaches’ and complicate the solution of problems).

I’ll quote myself again:

“Even at the beginning of turbulence at the exchange market it was clear that from the systemic point of view the situation will be under thorough control and nothing will happen with the euro…”

“It appears that if the single currency faces a question "to be, or not to be" which, in essence, would mean whether to "dismantle" the financial architecture which took shape during the recent decade … political factors are very likely to dominate again. … If global destabilization is not on the agenda, it is then obvious that the decisions of international participants should be aimed at maintaining the euro positions in the international monetary system.”

The measures adopted on October 27 are in the first place political in nature and indicate that interest in the current European architecture remains.

September 30, 2011

On September 29, 2011 German Parliament approved measures designed to enhance the role of Germany in stabilizing the situation in the E.U. and supporting the Euro.

By passing the measure, Germany promised to increase its volume of the loan guarantees from 123 billion euros to 211 billion euros, as agreed by national leaders in Brussels back in July (NYTimes, 29 Sept., 2011).

If other countries come up with positive decisions as well a significant mechanism to stabilize the situation in Euro area will be created.

However, back at the earlier stages, when currency problems emerged, it was clear that the situation will be thoroughly controlled from systemic standpoint, and nothing will happen to Euro (naturally, except for the current market volatility).

Half a year ago we wrote: “It appears that the future situation is likely to be similar to conditions when euro was created - when political rather than economic factors had a crucial role to play. Indeed in the late 1990s the integration processes in Europe reached certain level of development, still major differences between the countries were in place (for example, Germany and France, on the one hand; Greece and Portugal, on the other hand). These countries still had a long way to go before the real "unification" of their economies (important for efficient integration) could be achieved.

However, the differences were not a barrier to unification since the adopted political decisions put the participants before the ‘happened reality’ and forced them restructure all of their economic mechanisms and approaches to make the new financial architecture possible. In this regard, it appears that if the single currency faces a question "to be, or not to be" which, in essence, would mean whether to "dismantle" the financial architecture which took shape during the recent decade with all associated geoeconomic and geopolitical risks and global systemic changes which may follow as a result, political factors are very likely to dominate again. Such high level of decision-making will be required and then should be supported by economic mechanisms and leverages to make such decision possible. If global destabilization is not on the agenda, it is then obvious that the decisions of international participants should be aimed at maintaining the euro positions in the international monetary system.”